Losing Money At Zero Percent

One thing that can drive students crazy when first learning Finance is that sometimes things seem counterintuitive. For example, a recent article highlights that while a zero percent interest rate on car loans seems like a good deal, it can actually cost the uninformed buyer money. One specific example is the 2015 Jeep Cherokee SUV.  The vehicle lists for $27,153, but the buyer can take a $2,000 rebate or zero percent financing for 60 months. While many people would jump at the zero percent financing, the monthly payment under this option would be $452.55. If the buyer takes the rebate instead and finances the vehicle at 2 percent, the monthly payments would only be $440.88 per month. Although the article does not discuss a breakeven interest rate, we hope your time value of money skills allow you to calculate that the breakeven rate is 3.10 percent. So, if you can borrow at any rate below 3.10 percent for 60 months, the $2,000 rebate is preferable to zero percent financing!

The Chinese Stock Market Rout

Any market can experience a bear market and the Shanghai Composite, the 144 China-based companies that have a primary listing on major U.S. stock markets, is no exception. The Shanghai Composite lost about 8.5 percent on Monday and is down about 27 percent since its June 12 peak. The result is a loss of about $40 billion in stock value! Another measure of Chinese stock performance, the CSI300, which comprises the largest listed companies in Shanghai and Shenzhen, fell 8.8 percent Monday. As a result, the Chines government has said that it was ready to buy shares of stock to stabilize the market and stop the "systematic risk." Regulators also said that they would harshly punish anyone who was malicously shorting stocks.

Really Bad Financial Analysis

There are times when we get a headache from slapping our foreheads after reading really bad financial analysis, especially when done by a well-respected S&P 500 company like Boeing. But, after reading this recent article, it may be a headache that lasts for a while. As you can read, the article states that Boeing loses $23 million on each 787 it sells. And while we understand Microsoft loses money on every XBox One, it makes up for those losses on the sale of each video game. So, we were wondering how Boeing was making up the losses on the sale of each 787 until we read this:

"Commercial jetliner programs typically lose money in the early years of production until the heavy upfront investments in engineering and production are repaid. Boeing's accounting spreads those costs over a large block of planes the company expects to deliver."

In other words, Boeing is losing money only because they are spreading the initial cost of the project over the life of the project! Accounting for the initial cost of a project in this manner not only violates a basic tenet of capital budgeting, but gives a misleading profitability number to investors.

If You Don't Like It, Create Your Own

Russian authorities are upset that Standard & Poor's and Moody's, who cited falling oil prices, a recession, and international sanctions due to the conflict in the Ukraine, rated the country's debt as junk. With the mindset "We can do it ourselves and everyone will believe", Russia announced that is starting its own credit rating agency. We are sure that Russian sovereign debt will be AAA rated. 

Apple's Cash Hoard Grows

Apple's cash balance, which has been enormous by any measure, topped $200 billion for the first time. Cash held internationally has reached 89 percent, or about $180 billion, of Apple's cash. Apple has been reluctant to repatriate the money back to the U.S. as it would be forced to pay the full 35 percent corporate tax rate on the repatriated money. In an effort to pay investors, Apple has issued $50 billion in debt in various currencies around the world.

A $120 Million Bogey?

So what affects stock prices? In reality, pretty much everything, possibly even a bogey at the famed Road Hole at St. Andrews in Scotland. For the non-golfers, phenom Jordan Spieth made a bogey (one over par) on the 17th hole in the final round of The Open Championship on Monday, which virtually eliminated him from contention. Shortly after he made the bogey, stock in Under Armour, the company Spieth has a marketing deal with, fell from $89.47 to $88.79. While this is a relatively small dip, it reduced the market value of the company by $120 million. All in all, a pretty expensive round of golf.

An Overconfident Donald

One of the biases often discussed in behavioral finance is overconfidence, that is the belief your abilities are better than they are. Further, many people actually have overconfidence in individuals who tell everyone how good they are. Take Donald Trump. Although his wealth is estimated by Forbes at $4.1 billion, he recently stated that he was worth $10 billion as a self-made man (who started with his father’s millions.) And while his companies have filed bankruptcy four times, The Donald will tell you how good of an investor he is. Unfortunately, a recent article disputes this statement. If The Donald had taken his stated wealth of $500 million in 1982 and invested in the S&P 500, he would now have $20 billion, twice his stated worth. We hope you note a couple of important points. First, as we discuss in the textbook, the power of compounding greatly increases the value of a portfolio over time. Second, don’t always believe the hype of self-styled investment gurus.